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Bond Yield
A bond yield is the return an investor earns on a bond, expressed as a percentage. Government of Canada (GoC) bond yields are the main benchmark lenders use to price fixed-rate mortgages in Canada, so when yields rise or fall, fixed mortgage rates tend to follow.
Bond Yield Quick Facts
- The yield is the return an investor earns on a bond
- Bond yields move inversely to their price
- Government of Canada yields are a benchmark for fixed rates
- Rising yields push fixed mortgage rates up
- Bond prices are set by the bond market demand, not the central bank
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What Is a Bond Yield
A bond yield is the rate of return a bondholder earns, shown as a percentage of the bond’s price. Yields move inversely to prices: when investors buy bonds and prices rise, yields fall; when they sell, and prices drop, yields rise.
Lenders watch the Government of Canada (GoC) bond yields, especially the 5-year yield, because they use them to fund fixed-rate mortgages. This is why fixed mortgage rates can move day-to-day even when the Bank of Canada has not changed its policy rate.
Why Bond Yields Matter for Mortgages
Bond yields are the benchmark behind fixed mortgage pricing. The Bank of Canada explains that a government bond’s “rate of return is also known as the bond’s yield,” and those yields set the cost of funding fixed-rate mortgages.
When yields rise, lenders face higher funding costs and tend to raise fixed rates; when yields fall, fixed rates usually ease. Variable rates, by contrast, follow the lender’s prime rate rather than bond yields, which is why fixed and variable rates can move in different directions.
What Moves Bond Yields
A few forces push government bond yields up or down.
Inflation expectations. When investors expect higher inflation, they demand higher yields to protect their return, which lifts fixed mortgage rates.
Economic growth and policy. Strong growth or expected rate increases tend to raise yields, while weak data or expected cuts tend to lower them.
Safe-haven demand. During periods of uncertainty, investors buy government bonds for safety, pushing prices up and yields down, which can ease pressure on fixed mortgage rates.
For example, the 5-year Government of Canada bond yield rises by 0.40% over a month in response to stronger inflation data. Lenders that fund 5-year fixed mortgages against that yield typically raise their fixed rates soon after, even if the Bank of Canada leaves its policy rate unchanged.
Common Mistakes and Misunderstandings About Bond Yields
- Assuming bond yields and the Bank of Canada policy rate are the same
- Thinking yields move in the same direction as bond prices
- Believing variable rates follow bond yields
- Expecting fixed rates to stay put between policy decisions
- Overlooking inflation expectations as a driver of yields
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Frequently Asked Questions (FAQ) About Bond Yields
What is the difference between a bond yield and the Bank of Canada policy rate?
The bond market sets a bond yield and benchmarks fixed mortgage rates. The Bank of Canada sets the policy rate and drives the prime rate, which benchmarks variable rates.
How do bond yields affect mortgage rates?
Lenders price fixed-rate mortgages against the Government of Canada bond yields. When yields rise, fixed rates tend to rise, and when yields fall, fixed rates typically ease.
Why do bond yields and prices move in opposite directions?
A bond pays a set amount, so when its price rises, the return as a percentage falls, and when its price drops, the yield rises.
Which bond yield matters most for Canadian mortgages?
The 5-year Government of Canada bond yield is the key benchmark, since the 5-year fixed mortgage is the most common, popular and advertised mortgage term in Canada.
Do variable rates follow bond yields?
No. Variable rates follow the lender’s prime rate, which tracks the Bank of Canada policy rate, not bond yields.